Australia: Risks to lawyers of mixing legal and financial advice

In brief – Lawyers should confirm unusual risk advice in writing

The conduct standard established in the Citicorp Ltd v O'Brien case regarding commercial transactions is well known among lawyers. However, a recent case in the United Kingdom highlights the problem in practice, particularly when dealing with unusual transactions. Practising good risk management and confirming unusual risk advice in writing is the best course of action.

Citicorp v O'Brien sets conduct standard in Australia

Most solicitors will know the rule in Citicorp Ltd v O'Brien [1996] NSWSC 514 without any real need to refer to Riley's. This is because the rule in Citicorp has been woven into the fabric of legal training and practice in Australia since 1996.

When a client proposes to enter into a transaction, his or her solicitor should refer to the Citicorp case as the conduct standard, and advise the client that:

  • the financial aspects of a transaction are not a matter in respect of which the solicitor can advise, and
  • the client should obtain independent financial advice as to the merits of the transaction.

Citicorp rule reconsidered but ultimately reinforced in Dominic v Riz

The NSW Court of Appeal came to consider Citicorp again in Dominic v Riz [2009] NSWCA 216, at [58] after a trial judge had suggested:

... it is often difficult... to disentangle legal and business or practical advice, and a solicitor who is carrying out a transaction for a client is not justified in expressing no opinion when it is plain that the client is rushing into an unwise, not to say disastrous, adventure.

The Court of Appeal in Riz rejected that finding and reinforced the Citicorp rule:

If, however, the solicitor during the execution of his or her retainer learns of facts which put him or her on notice that the client's interests are endangered or at risk unless further steps beyond the limits of the retainer are carried out, depending on the circumstances, the solicitor may be obliged to... bring to the attention of the client the aspect of concern and to advise of the need for further advice either from the solicitor or from a third party... (at [90]).

An unusual transaction case highlights problem in practice

A recent decision of the High Court of England and Wales in Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch) is a very good example of the problem in practice.

The transaction was unusual because the deal involved the purchaser of a property paying the deposit to the vendor's solicitors as agents for the vendor (only). The vendor did not complete, and the deposit was lost because the vendor's solicitors disappeared amidst allegations of fraudulent misuse of client money.

The conveyancer advised the purchaser of the risk that:

  • the deposit would not be recoverable if the vendor did not complete,
  • the vendor might not be able to complete if the vendor could not obtain releases of relevant charges, and
  • since the conveyancer did not know how much was secured by those charges, the purchaser could not know if they could be paid off from the purchase money.

Importantly, in view of the unusual nature of the transaction, the conveyancer also obtained written confirmation of the advice from the purchaser as follows:

... I have also been advised against releasing the deposit... to the seller. I am also aware that I risk losing my deposit if the seller is unable to complete the sale.

The court in Kandola summarised the position as follows:

... a general duty to make checks about risk of future insolvency... [cannot] arise merely because the client is incurring a risk of loss if the counterparty becomes insolvent. Nor in my view does such a duty arise merely because the transaction takes an unusual form which does involve a solvency risk (e.g. on release of a deposit) where the more normal form would not (deposit held as stakeholder). In such cases the duty of the solicitor is to advise of the unusual risk, but not to seek to evaluate it unless specifically instructed to do so. In part that is because the decision whom to trust in business is a commercial decision for the client to take and not the solicitor... Just because a solicitor (or other professional) could take a particular step does not mean that it is his duty to do so (at [51]-[52]).

Good risk management practice is key

A lawyer can adopt a simple risk management practice in commercial transactions by considering the following questions:

  1. What could go wrong and what are the consequences of things going wrong?
  2. What is the likelihood of things going wrong?

Question (a) is a legal question, and the solicitor has a duty to advise on that.

For a sophisticated client, the duty would more likely be to advise that the loan was unsecured and the client would rank as an unsecured creditor (assuming the lawyer knew the client understood these terms).

For an unsophisticated client, proper advice might extend to pointing out the practical consequences of the legal obligations arising from the document. For instance, if the borrower's business, of which the client knew nothing apart from representations made by her son (principal of the borrower), failed, the client could lose her home and livelihood (see Provident Capital Ltd v Papa [2013] NSWCA 36).

Question (b) is a question for a non-legal expert (eg a financial adviser). Whether or not the client asks this question, it may be prudent to advise the client to obtain the relevant non-legal advice.

Confirm advice on unusual risks in writing

As usual, a lawyer should document advice in a file note. A lawyer could do worse than using the two questions in the file note. For more unusual risks, the advice should be confirmed in writing, as the conveyancer did in Kandola.

A slightly modified version of this article first appeared in the August 2015 edition of Law Society Journal.

For further information, please contact:

Toby Blyth
Professional indemnity
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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